Taveras wants to scale back Providence pension investments held in hedge funds

Friday

Jun 7, 2013 at 12:01 AM

PROVIDENCE — Mayor Angel Taveras waded into the murky waters of hedge funds and fees Thursday, raising questions at a city investment meeting about the Providence retirement system’s $51-million stake...

By Mike Stanton

PROVIDENCE — Mayor Angel Taveras waded into the murky waters of hedge funds and fees Thursday, raising questions at a city investment meeting about the Providence retirement system’s $51-million stake in hedge funds and the nearly $1.4 million in fees paid over the past 16 months.

Joining a debate that has played out on the state level, Taveras took an opposite tack than his potential Democratic rival for governor in 2014, General Treasurer Gina M. Raimondo.

While Raimondo has defended moving 15 percent of the $7.6-billion state pension fund into hedge funds over the past few years to minimize risk, Taveras asked the city’s investment consultant to explore possible cheaper alternatives that could achieve comparable returns.

When Taveras became mayor in 2011, he inherited a city pension fund that had begun investing in hedge funds a decade earlier. From the beginning of 2010 through April 2013, city data shows, Providence paid nearly $2.8 million in hedge-fund fees.

In October 2011, the Board of Investment Commissioners that the mayor chairs adjusted its targeted stake in hedge funds from 12 to 13 percent of the overall pension fund.

That share has risen to 19 percent today, or about $51 million of a $266-million fund. As part of ongoing efforts to periodically re-balance the portfolio, the city is in the process of pulling $11 million out of hedge funds, including $5 million that the investment board voted Thursday to move into bonds.

Raimondo, the state Investment Commission and the state’s investment consultants argue that hedge funds are an alternative vehicle to “hedge” a pension fund’s bets in stocks, to minimize risk from a calamitous event such as the 2008 market crash that wiped $2 billion from the state pension fund. Had the state been in hedge funds then, Raimondo says, the loss would have been $500 million less.

But others in the financial world question hedge funds as too risky, with high fees and less transparency than more traditional investments. Funds typically charge 2 percent of the assets managed plus a 20 percent performance fee of any gains.

Edward “Ted” Siedle, a former securities lawyer who runs a pension investigation firm, was hired this week by Rhode Island’s largest public-employees union, Council 94, American Federation of State, County & Municipal Employees, to investigate Raimondo’s hedge-fund investments after writing a series of online columns for Forbes magazine criticizing the treasurer’s strategy.

Taveras said in an interview Wednesday that he had concerns about the city’s hedge-fund exposure after reading Siedle’s columns as well as recent articles. He cited perhaps America’s most famous investor, Warren Buffet, who is ahead in a 10-year bet with a New York money manager that the S&P stock index fund will outperform hedge funds. Despite losing ground to the hedge funds during the 2008 crash, Buffet five years into the bet has gained 8.69 percent compared with 0.13 percent for the hedge funds.

“You hear these experts talking about hedge funds, and you worry,” said Taveras. “It’s my responsibility as a fiduciary to investigate and ask questions.”

Taveras noted that 37 percent of all the fees the city pays to investment managers go to the hedge-fund managers who invest 19 percent of the money. Traditional stock investments, by contrast, charge fees that are five times less –– 0.6 percent vs. 3 percent for the city’s three hedge funds.

Raimondo criticized Siedle’s hiring, questioning his motives and credibility in writing columns that helped him land the union business.

But Taveras says Siedle’s columns “opened a lot of eyes here … He has raised issues worthy of exploration — certainly the state should be looking at this, too.”

Asked about Raimondo’s argument in favor of hedge funds, Taveras said: “That’s her opinion. A lot of good experts seem to be suggesting the opposite.”

According to city investment data, Providence paid nearly $1.4 million in fees to three hedge funds for 2012 and the first four months of 2013: $709,000 in 2012 and $684,000 for January through April of this year.

The bulk of that, $936,000, went to the city’s largest hedge fund, Renaissance Institutional Equity Fund, which holds nearly $33.9 million. The fund is up 9.3 percent in 2013, earning $438,000 in performance fees this year alone.

The city’s pension consultant, Eric Bertonazzi, president of Wainwright Investment Counsel of Boston, told the mayor at Thursday’s investment board meeting that the explanation on Renaissance’s fees was simple: “They made a lot of money.” He noted that the fund charges a 10-percent performance fee, less than the 20 percent that many hedge funds charge; it also charges a lower-than-normal management fee of 0.5 percent.

The data also contained fees for the city’s private equity investments, including $1.1 million invested with the venture-capital firm Point Judith II, where Raimondo worked before becoming treasurer. Point Judith collected $64,749 in management fees from 2010 through April 2013.